£12,000 of this FTSE 250 dividend star could make £21,981 a year in passive income over time!

FTSE 250 investment manager abrdn (LSE: ABDN) paid a dividend of 14.6 %. At the current stock price of £1.49, it offers a yield of 9.8%. This is one of the highest scores for any major FTSE index.

The company has paid the same dividend every year since 2020. Of course, all companies face risks, and abrdn is no different.

What is important in my opinion is that its ongoing restructuring fails to develop as it would like. Additionally, a renewed increase in the cost of living could cause investors to pull money out of the company.

However, analysts forecast it will pay dividends of 14.6pn this year, next year, and in 2026.

How much income can be made?

Passive income made with little daily effort, such as dividends. The only real effort involved here is to pick stocks in the first place, and then monitor their progress from time to time.

I started investing in shares 30 years ago with about £9,000. The average UK savings amount is £11,000. And the average amount in a UK savings account is £17,000.

So taking a little less than the average rate of this – £12,000 – for example would make £1,176 in the first year at 9.8%.

Over 10 years at the same average yield, abrdn shares will pay £11,760 in dividends. And over 30 years on the same basis this will rise to £35,280.

It's a great return, but it can be much higher than the standard method used to maximize profit margins.

The 'miracle' of integration

Instead of taking dividends from the investment every year and using them, they can be used to buy more shares of brdn instead. This is called 'dividend compounding' and is the same basic idea as allowing interest to grow on a bank account.

Starting again with £12,000 in shares abrdn – but reinvesting the dividends – would make £19,846, not £11,760 in dividends.

And over 30 years, given the same average yield of 9.8%, another £212,296 in dividend returns would have been made, not £35,280!

Adding to the initial investment of £12,000, holding abrdn will pay out £21,981 a year in dividends, or £1,832 every month!

Are the shares also well priced?

It is important to remember that dividends change as share prices move and dividend payments change. That's why the little effort involved in checking stock prices is important though.

If the share no longer delivers the yield the investor is looking for, it can be sold. Another high yielding stock can be bought instead. To minimize the chance of losing money on any sell-off in share price, I look for stocks that appear to be undervalued.

In abrdn's case, it trades below its peer group on a significant price-to-earnings (P/E) ratio for stock valuation.

Its IP/E of 8.4 is very cheap compared to its competitors' average of 28.1. These include RIT Capital Partners at 11, IM&G on 16.9, The Bridgepoint Group at 37.8; Legal & General in 46.7.

Will I buy shares?

I already own the stock and will soon add to my holding based on its very high dividend yield and significant volatility.